For insiders with extensions of credit that when aggregated exceed $500,000, I understand that prior Board approval is required for each new extension of credit. My bank's approach to accomplishing this without taking every individual loan to the Board is to have the Board annually approve the insider's total lending limit, which includes outstanding debts, available credit, and what we call an unfunded commitment, which is basically a cushion for future borrowings.

For example, if Director Bob's extensions of credit total $700,000, and the Board has already preapproved an additional $50,000 for future borrowings, is it okay that we close a new auto loan for $20,000 without taking that specific loan application to the Board for prior approval? The available credit in the $50,000 unfunded commitment (cushion) would be decreased immediately.

Similarly, would this approach suffice for Director Bob's related interest checking account when it overdraws? We, of course, don't allow directors and executive officers to overdraw. However, some related interest accounts have been overdrawn in the past, and management has relied on this unfunded commitment (cushion) to argue that it was preapproved, assuming the amount of the overdraft did not exceed the available funds in the cushion. Is this okay?

I appreciate any and all feedback.

So many things seem wrong with this at first read. Here is what is coming to mind: When the Board approves a loan, they are approving the terms of the loan as well as the loan amount. It sounds like your Board is only approving an amount. And if you are giving your Director's a 12-month commitment, you would need to give all of your borrowers 12-month commitments, or else you would be giving them preferential treatment. There is also a requirement that current financials be reviewed prior to making a Reg O loan, are you collecting these annually when you approve this commitment? What if the Director's credit goes into the tank at some point during the year? I've seen this happen.

Financials are received and reviewed annually, and the bank does approve unfunded commitments for other customers. You raise some very good points though, ones that I hadn't thought of.

There may in fact be nothing wrong with what you are doing. I've seen Reg O get a lot of scrutiny in the past, so I'm probably overly conservative. I've always thought that we should be doing something for affiliate and business account overdrafts, but I'm not sure if an undocumented commitment is sufficient.

3--1091

PRIOR APPROVAL--Blanket Resolution for Approving Loans

A blanket resolution passed by the board of directors approving loans in excess of $25,000, but not in excess of the maximum loan limits of the bank, satisfies the prior approval requirement if the Board makes a good faith assessment of the creditworthiness of each person covered by the resolution and the credit limits are no greater than the person's credit would warrant. STAFF OP. of May 18, 1979.

Authority: 12 CFR 215.4(b).

Hmmm...What about loans under $25,000?

Total lending relationships under $25,000 do not need prior approval. They are not really referring to individual loans.

I see. Thank you, Randy.

I'd like to add my question to this thread that has already been created since it's on the same topic...Reg O: Prior Approval.

Does the prior approval requirement taken from section 515.4(b) as shown below communicate that the entire board has to be present and cast a vote when an insider credit is up for approval?

Section 215.4(b)(1)(i) says the following with respect to prior approval of insider loans (subject to the dollar amount and percent of capital thresholds):

"The extension of credit has been approved in advance by a majority of the entire board of directors of that bank;"

My interpretation of this language is that if the bank's "entire board" is made of 8 individuals, the credit has to be approved in advance by 5 or more directors (not including the insider whose credit is subject to the approval) at all times when prior approval is required unless the number of the entire board of directors changes. So if only 5, 6, 7 or 8 directors are present at loan committee to vote on approval of an insider credit, at least 5 directors need to approve and not simply a majority of those present at the meeting.

I do not see any language that communicates a requirement that the entire board has to be present to cast a vote nor would I interpret the prior approval language above as communicating that the entire board has to be present to cast a vote. My reading of this requirement is simply that the extension of credit has to be approved in advance by a majority of the entire board...that's it.